INTRODUCTION TO DERIVATIVES INDUSTRY
Derivatives
A derivative is a security or contract designed in such a way that its price is derived from the price of an underlying asset. For instance, the price of a gold futures contract for October maturity is derived from the price of gold. Changes in the price of the underlying asset affect the price of the derivative security in a predictable way.
Evolution of derivatives
In the 17th century, in Japan, the rice was been grown abundantly; later the trade in rice grew and evolved to the stage where receipts for future delivery were traded with a high degree of standardization. This led to forward trading.
In 1730, the market received official recognition from the “Tokugawa Shogunate” (the ruling clan of shoguns or feudal lords). The Dojima rice market can thus be regarded as the first futures market, in the sense of an organized exchange withstandardized trading terms.
The first futures markets in the Western hemisphere were developed in the United States in Chicago. These markets had started as spot markets and gradually evolved into futures trading. This evolution occurred in stages. The first stage was the starting of agreements to buy grain in the future at a pre-determined price with the intension of actual delivery. Gradually these contracts became transferable and over a period of time, particularly delivery of the physical produce. Traders found that the agreements were easier to buy and sell if they were standardized in terms of quality of grain, market lot and place of delivery. This is how modern futures contracts first came into being. The Chicago Board of Trade (CBOT) which opened in 1848 is, to this day the largest futures market in the world.
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Derivatives
A derivative is a security or contract designed in such a way that its price is derived from the price of an underlying asset. For instance, the price of a gold futures contract for October maturity is derived from the price of gold. Changes in the price of the underlying asset affect the price of the derivative security in a predictable way.
Evolution of derivatives
In the 17th century, in Japan, the rice was been grown abundantly; later the trade in rice grew and evolved to the stage where receipts for future delivery were traded with a high degree of standardization. This led to forward trading.
In 1730, the market received official recognition from the “Tokugawa Shogunate” (the ruling clan of shoguns or feudal lords). The Dojima rice market can thus be regarded as the first futures market, in the sense of an organized exchange withstandardized trading terms.
The first futures markets in the Western hemisphere were developed in the United States in Chicago. These markets had started as spot markets and gradually evolved into futures trading. This evolution occurred in stages. The first stage was the starting of agreements to buy grain in the future at a pre-determined price with the intension of actual delivery. Gradually these contracts became transferable and over a period of time, particularly delivery of the physical produce. Traders found that the agreements were easier to buy and sell if they were standardized in terms of quality of grain, market lot and place of delivery. This is how modern futures contracts first came into being. The Chicago Board of Trade (CBOT) which opened in 1848 is, to this day the largest futures market in the world.
Download Full Project Report
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